The paper will address each in turn along what lessons have been learnt
since Roads Funds were first established in New Zealand.

The National Roads Fund/Account

History

New Zealand's first road fund was established by the National Roads
Act 1953 with Fuel Excise, Registration Fees, Heavy Traffic Fees and a
mileage tax as the main sources of revenue. By the 1979 financial year
these sources had been rationalised to Fuel Excise and Road User Charges.
Registration Fees were now credited to the central Government Account.
Expenditure from this fund was solely roading related.

The enactment of the Transit New Zealand Act 1989 (The Act), created
the Land Transport Fund (LTF) and Transit New Zealand (Transit). The LTF
retained the revenue sources of the old Fund, and reacquired Registration
Fees ($157M in 1997). However, the new Fund was also required to meet central
government's contribution to:

passenger transport funding ($42.3M in 1997);

Police road safety enforcement ($138.9M in 1997);

the operating costs of the Land Transport Safety Authority (LTSA),
($22.5M in 1997); and

The costs of collecting NRF revenue ($44.6M in 1997).

The objective of funding all roading related expenditure from the same
source was to optimise the allocations to each activity. This objective
has only been partially achieved, because of the difficulty experienced
in developing a rational agreed process of evaluating the benefits and
costs of each activity.

The other important change to note is that Government established a
control over both the rate at which funds were credited to the LTF and
the total amount expended from it. The establishment of this control resulted
in a loss of:

certainty and predictability over the rate at which roading revenue
could be expended; and

compensation for the additional demands placed on the roading network
as a result of traffic growth which averages 4% per Anum.

Following, in real terms, a 15% reduction in roading funding for the
1991 financial year, considerable energies were directed towards reducing
the effects of Government's control mechanism. Roading is after all, a
long-term business, with construction projects often running for more than
one year. As a result significant one year increases and decreases in expenditure
levels do not promote efficiency in roading provision.

The first success was getting an amendment to the Act, to guarantee
in nominal terms:

at least 97% of the current year's expenditure for the first year out;
and

at least 95% for the second year out.

The second success was encapsulated in the passing of the Transit New
Zealand Amendment Act (The Amendment Act) and the establishment of the
National Roads Fund (NRF) and Transfund New Zealand (Transfund). The NRF,
while by and large the LTF reconstituted, in that it has the same sources
of revenue and funds largely the same organisations and activities, does
have one important difference. This difference is, that once the cost of
the Police's and the LTSA's road safety activities have been met, any additional
revenue is available for use by Transfund. This means that increased wear
and tear on the roading network, caused by increased traffic paying additional
revenue, can be compensated for by increased expenditure. Thereby creating
a much closer relationship between road use and road expenditure and reinstating
largely the pre 1989 position.

Government still sets the rates of taxation for inflows to the NRF.
However, it can be argued that this is appropriate, because road taxes
are established under legislation, as compared to the market and letting
the willing buyer, willing seller concept, establish the level of charge.
Currently Government has made the commitment that it will ensure that the
rates of taxation will be sufficient to enable Transfund to fund projects
down to a B/C of 4.

Delivery Mechanisms

The establishment of the National Roads Board (NRB) in 1954 established
the separation between client and deliverer particularly for State Highways.
Previously the Ministry of Works was responsible for the planning and delivery
of all State Highway works. The establishment of the NRB as an independent
client increased the rigour and accountability over the former Ministry
as to what work was undertaken and to what standard. For State Highways
the Ministry, (or its corporatised successor, Works Corporation Ltd), continued
to supply virtually all-professional services and the bulk of maintenance
works until 1991. The Act required that from July 1991 all State Highway
professional services and works be competitively tendered, resulting in
significant savings, i.e. in excess of 20% for professional services. These
steps left Transit as the Funder of both State Highway and Local Authority
works and the Client/Provider of State Highway works. It also left the
suspicion in some sectors of Local Government that State Highways, despite
the transparent funding allocation, were receiving more than a fair allocation
of the available funding. On Transfund's establishment it acquired Transit's
Funder responsibilities. There now exists a transparent separation of Funder,
Client/Provider and delivery for State Highways. A similar position will
be achieved for Local Authority roading by 1 July 1999, when all local
roading works are required to be competitively tendered.

Board Structures

The three road fund boards have had their membership made as follows:

National Roads Board

1954-1989

Transit New Zealand

1989 to present

(The Authority)

Transfund New Zealand

1 July 1996 to present

2 officers of the Ministry of Works

7 to 10 members. No sector representation. Appointments made on their
ability to ensure the objectives of Transit are achieved

2 representing Transit New Zealand

1 representing the Ministry of Transport

1 representing local government

2 nominated by the NZ Counties Association

1 representing road users

1 representing cities, i.e. >20,000 people

1 representing other aspects of the public interest

1 representing towns,

i.e. <20,000 people

1 representing commercial vehicles

1 representing private motorists

The Governor General on recommendation from the Minister appoints all
Board members. The Governor General also appoints the Chairman and Deputy
Chairman as part of this process. The only exception was for the 1973 -
1989 period, when the Chairman was the Minister of Works initially and
then the Minister of Transport. Today the Board's and the Authority's accountability
to the Minister is through the mechanism of a Performance Agreement, (copy
available). In fact, the Amendment Act includes the following section,

For the avoidance of doubt, it is hereby declared that in performing
or exorcising any functions or powers in relation to -

(a) The inclusion of outputs and capital projects in the National
Roading Programme; and

(b) The making of payments from the National Roads Account, -

the Board shall act independently of the Minister

This means, that providing the Minister is in agreement with the methodology
used to evaluate projects, (the basis is in the Performance Agreement),
then Transfund can act independently. It also means that the Minister avoids
project and location specific lobbying.

Lessons Learnt

The lessons learnt over the years include:

The necessity for the adequacy, certainty and predictability of revenue.
Without that, sudden budget increases and decreases do little for long
planning and ultimately efficiency. In fact the sudden budget reduction
in 1991 almost caused the demise of Transit as sectors of local government
lobbied extensively for the abandonment of the concepts it embodied;

That by having a nationally recognised basis for project evaluation
and fund allocation political pressure is reduced on both the Minister
and the funding agency; and

That the separation of funder, provider and deliverer promotes much
stronger accountabilities and improved, more efficient delivery.

Funding Cycle

Before describing the detail of revenue and expenditure, a broader picture
of the flow of road funds in the current New Zealand environment is appropriate.
This is shown diagrammatically below. Apart from government directive,
the Government has the ability to influence the flow of funds in only two
places:

1. The contribution by road users to the Dedicated Road Fund.

2. The general petrol tax collected from road users, which goes directly
to the Government.

Both of these are provided by a taxation on petrol and alternative fuel
sales. They are currently set at 9.4 cents/litre and 20.8 cents/litre respectively.

Revenue

Current Revenue Sources

The NRF has the following sources:

Fuel Excise;

Road User charges;

Motor Vehicle Registration Fees;

Interest;

Sale of Surplus Roading Properties; and

GST compensation.

Each revenue source will be addressed in turn.

Fuel Excise - $298M

The total Fuel Excise levied on petrol is 30.4 c/litre. For the year
ended 30/6/97of the $900M total excise duty to be collected, $298M will
be credited to the Fund. This is collected by NZ Customs and an amount
of $600,000 per anum is paid by the NRF as a contribution towards collection
costs. The level of evasion is minimal because it's collected at source
i.e. NZ's sole refinery or at the ports for direct imports.

Since 1984 the amount credited to the NRF or its predecessors has varied
as follows:

Date of Increase

Portion allocated to Roading (cents/litre)

Total Excise (cents/litre)

Nov 1984

8.9

--

April 1987

9.9

--

April 1988

10.9

30.2

July 1991

7.1

30.2

July 1992

9.4

30.2

June 1991 marks the last time a rationally based relationship existed
between the total contribution paid for roads by the users of petrol vehicles
(mainly cars and light vans) and diesel powered vehicles (mainly trucks,
although the number of diesel powered cars is increasing rapidly).

Since the establishment of Transit, Government varied the rate at which
Fuel Excise was credited to the LTF to prevent the balance of the LTF from
climbing while it curtailed expenditure, thereby reducing potential political
pressure. It did, however, still receive considerable political pressure
for its diversion of road user funds. Amending Fuel Excise was chosen as
the mechanism for achieving this objective because it was:

far easier than amending Road User Charges;

it was only a portion of a larger tax;

the increased revenue, i.e. residual amount after crediting the LTF
could be used to balance the remainder of its budget without increasing
taxation.

Road User Charges (RUC) - $467M

Road user charges are levied on diesel powered vehicles on the basis
of weight, axle configuration and distance. The collection of Road User
charges is managed by the LTSA under contract from the Ministry of Transport
at an approximate cost of $15M. The LTSA then contracts a number of providers
to do the actual collection. The need for these contracts arises because
RUC is a tax, and in New Zealand taxes must be collected by Government
Departments.

Initially the collection of Road User charges was primarily made by
NZ Post, but now a number of agencies may undertake this function. The
result is that NZ Post currently collects approx. 50% of all RUC's at $3.30
per transaction.

Other agencies include BP petrol stations, Vehicle Testing NZ Ltd, Vehicle
Inspection New Zealand Ltd, NZ Automobile Association, and AMI Insurance
Company. The system operated by the new agencies is an RUC specific electronic
Funds Transfer (EFT Pos) system using a "swipe" card. One card
can operate for up to 3 vehicles, enabling it to handle a tractor unit
and two trailers. When purchasing an RUC licence, the trucker through a
numeric keypad is simply asked, what type of licence they want, the distance,
vehicle type and weight. The amount is calculated by the central computer,
the trucker confirms that they are happy to pay the amount and the amount
is debited to their bank account that night. The new licence is printed
as soon as the trucker confirms their acceptance of the cost.

Costs are transaction based, with costs per transaction ranging from
$1 to $3. The actual cost depends on the level of Agency input or resources
required to process the transaction, i.e. whether or not the trucker can
purchase a licence directly from a machine or do the agency's staff have
to become involved in the process.

There is also a direct connect facility where, through use of special
terminal (for security reasons), operators can buy licences from their
own offices. The operator pays the cost of the terminal, $4,500, $85 per
month for maintenance communication, and a net cost of 5c per transaction.

The system enhancements to make this possible cost in the vicinity of
$3M, with BP, the main provider, incurring an additional $1M.

The changes since the old NZ Post days have been of profound benefit
to the NZ trucking industry. Truckers can virtually purchase RUC licences
at any time and without deviating from their route.

However, the ease of licence purchase also assists "Just in Time",
(i.e. just before a Police weigh point), purchasing. This leads to the
next point.

There has been growing concern experienced over the level of evasion
of Road User Charges. A recent survey placed the level of evasion in the
vicinity of $40M for heavy vehicles and $12M for light vehicles per anum
or just under 12.3% of the $424M collected in 1996, the year of the survey.
Also it is estimated that a further $30M has been legally avoided.

The actions proposed to remedy this situation include:

increased levels of enforcement. Currently just under $7M is being
spent on enforcement. This figure has effectively remained constant for
the last 4 years, during which time RUC has increased from $304M to a predicted
$424M;

matching the RUC data bases to the Motor Vehicle Registration data
base to identify registered light diesel vehicles which do not have current
RUC licences;

providing Police with improved computing power, to speed the calculation
of infringements and provide an online access to the RUC and MVR data bases;

reviewing current penalties;

enhancing the liaison/co operation between the Police and the Land
Transport Safety Authority based, RUC audit unit;

reviewing whether or not the current 5% weight tolerance is still appropriate
given the improvements in weighing technology. In fact many truckers, particularly
those with on board weighing devices are loading to the upper bounds of
the 5% weight tolerance as a matter of course;

reviewing the current basis on which RUC are calculated, i.e. with
the current ability to purchase a trip specific licence, is the current
45% discount factor for returning empty still appropriate?

Motor Vehicle Registration Fees (MVR) - $157M

Again the collection of motor vehicle registration fees is administered
under contract by the LTSA with further contracts to service providers.
Similarly all collections were initially made by NZ Post, but this has
been diversified to Vehicle Testing NZ, Vehicle Inspection NZ, the Automobile
Association and AMI Insurance. These alternative agencies are now responsible
for 30% of all registrations processed thereby making a significant step
in reducing the dependency on NZ Post and the possibility for it to monopoly
price its services. The total costs for MVR charged to the LTF are $29M.
This may seem high in relation to the $157M of revenue collected but it
must be recognised that revenue collection is only part of the operation.
The other functions include the maintenance of a vehicle ownership database
and the collection of Accident Compensation & Rehabilitation Levies
which is recovered on a marginal cost base only.

Interest - $15M

This revenue item, while only small, is a key component in Government
recognising that the NRF is a dedicated fund, funded by the road user for
road users. The payment of interest by the Government on the cash component
of the NRF balance recognises that Government has in effect borrowed from
Road Users, to minimise its global external debt servicing costs. As a
result Transit, which undertakes the accounting function for the NRF, has
to maintain both cash and accrual accounts. Also consistent with the borrowing
concept is the use of a market derived interest rate, i.e. Treasury 90
day Bill rate which is determined by weekly tender, and applied to the
NRF's daily cash balance.

Sale of Surplus Roading Properties - $9M

Whenever State Highway related land or buildings are sold the proceeds
are credited to the NRF. The logic for this is that these properties have
been purchased with road user money so the proceeds should return there.

GST Compensation - $121M

Compensation for Goods and Services Tax (GST) is credited to NRF at
the rate of 1/9th of the NRF's expenditure. This is largely a bookkeeping
entry to compensate for the payment of GST on all revenue collected.

Revenue Projections

Accurate revenue projections have always been important, but with changes
post 1 July 1996 and the projected decrease in the NRF's balance its importance
will increase significantly. Recognising this, a joint project, which included
the Treasury as a party, to develop a revenue forecasting model was commissioned.
The resulting report identified close relationships have existed in the
past between revenue collected and other variables. The prime relationship
for the two major revenue sources are as follows:

Fuel Excise: the absolute level change in real private consumption
and the absolute level change in real imports or goods and services.

The key lesson learnt in managing this project was that models of this
type must be based on variables for which future projections are already
obtainable.

Lessons Learnt

The following lessons have been learnt in ensuring revenue is collected:

The direct collection of revenue at source, such as happens with Fuel
Excise is the most effective, while admitting that it can be a very blunt
and at times unfair method of collection;

The level of resource committed to enforcement must keep pace with
the growth in revenue;

Legislation governing the collection of revenue must keep pace with
technology.

Expenditure

Of the expenditure made from the NRF, I will only deal with the payments
to Transfund New Zealand, as compared to the other transport Agencies,
i.e. Police and the LTSA. This heading will be covered in four sections:

Background;

Preparation of the National Land Transport Programme;

Cash Flows; and

The Audit function.

Background

Each year The Board approves the total value of the National Roading
Programme (NRP). The only constraints on the Board regarding the Programme
it approves are:

That the outputs or capital projects contained therein have been evaluated
to the satisfaction of the Board in accordance with the relevant provisions
of the most recent approved performance agreement;

That the total value of the Programme will not exceed the sum of:

the roading revenue for the year net of collection cost , refunds and
the value of the safety (Administration) Programme (Police and LTSA); and

the opening balance of the National Roads Account (Account),

less

The minimum balance of the Account for that year as provided in the
Performance Agreement (currently $20M)

That the outputs or capital projects included in the Programme are
not inconsistent with any National or relevant Regional Land Transport
Strategy

That when an output or capital requested by Regional Council or Road
Controlling Authority (RCA) is not approved, the Board is required to give
the reasons for its decision in writing.

With the Board approving its Programme of work, i.e. without the need
for Government approval or announcement as part the formal Government Estimates/Budget
process, earlier approvals are possible. Early approvals provide significant
advantages to RCA's in that they can obtain better pricing through letting
their contracts earlier and from not trying to force a year's work programme
into say 8 - 9 months. The other advantage for Local Authorities it that
early approval provides alignment with their planning and property-tax
fixing timetable.

Preparation of the National Land Transport Programme

Turning now to the programme preparation side of Transfund. The NRP,
which forms the basis of Transfund's activity for the next 12 months and
beyond for long term projects, is built up from bids by local government
and Transit. These bids are then subject to checks on the reasonableness
and appropriateness of any supporting B/C calculation before ranking them
in order of priority. Maintenance is accorded the highest priority, with
other projects ranked in B/C order until all available funds are utilised
irrespective of where the project is located, i.e., there are no preset
allocations for Transit, local authorities or work type.

Funding levels for maintenance are determined using a combination of
professional judgement supported by a number of information systems including
the Road Assessment Maintenance Management Systems (RAMM). RAMM is a computerised
pavement management system that includes road inventory and treatment selection
for determining work programmes based on engineering and economic analysis.
All RCA's in New Zealand are required to operate RAMM if they wish to receive
Transfund funding.

Road Controlling Authorities bids are then vetted by Transfund programming
staff before a final recommendation for inclusion or otherwise into the
NRP is made. The vetting process includes a sample audit of project B/C's.
The sample selection is made on a stratified basis, with all projects costing
more than $1M being automatically selected.

To further refine the method of allocating maintenance funds a project
has recently been commissioned with the objective of determining the level
of maintenance funding provided by Transfund. The intended objectives of
the project are to:

To develop a methodology for deriving optimal maintenance funding levels
for individual road controlling authorities by defining levels of service
for each maintenance category which are:

Appropriate to the particular RCA.

Economically justified and sound in terms of user benefits and life
cycle costs of the asset. (The returns on expenditure are to be comparable
with those from capital expenditure.)

Able to be integrated into asset management plans and maintenance contracts.

To Investigate the feasibility of producing tables containing recommended
levels of service and corresponding maintenance strategies, based upon
minimising life cycle costs for the given level of service.

The results of this project, as can be imagined, are awaited with interest
by roading authorities receiving Transfund funding.

Cash Flows - The Cash Funding of Transfund by the NRF

Moving more to the mechanics of the NRF's operation. Currently they
pay Transfund at the beginning of each month, its estimated cash requirements
for the month plus sufficient for an approximate $20M float. The Ministers
of Finance and Transport agree the payment profile at the beginning of
the year. To date month end balances have ranged from $7M to $23M , and
Transfund has had an average of $50M invested in the short-term money market.

Cash Flows - The Cash Paid to Transit and Local Authorities by Transfund

Currently Transfund pay Transit for work completed in a "back to
back" arrangement. The amount paid by Transfund matches the value
of payments made by Transit, less any income it earned from investing cash
balances, managing properties purchased ahead of State Highway construction
and any other trading revenue. Total revenue from these sources is approximately
$9M, compared to Transit's total budget in 1997 of $420M. The logic for
this approach is that Transfund has determined the value of State Highway
outputs and capital projects it wishes to purchase and wants to pay the
least amount possible for them. However, this approach has provided little
tangible incentive to maximum returns from investment and property management
activities.

Local authorities, on the other hand, are paid on the basis of monthly
claims for work invoiced. The other important difference is that, while
Transit is effectively 100% funded by Transfund, Local Authorities are
paid on average 50% of the works total value. The balance is met from the
property taxes raised by the local authority. Within the "on average
50%" paid to local authorities a multitude of rates exist depending
on the local authority's ability to pay and the type of work undertaken.
The most important rate is the "base rate", which is calculated
after considering :

the size of the local authority's roading programme: and

the financial resources available to it, i.e. its ability to levy value
based property taxes,

using the following formula:

Formula: FAR = k1 + k2 log (P/LV)

Where: FAR = Financial Assistance Rate

P = the current years allocation for maintenance, reseals, rehabilitation
and minor safety projects ($000's)

LV = 3 yearly average net equalised land value ($M)

k1 & k2 = constants which are established to give a national FAR
of 50%

The result of this calculation is then compared to previous years base
rate. If the result of the calculation indicates:

a margin of greater than 2%, a move is made towards the indicated
rate by half the difference or such as to be within (+) or (-) 2% of the
indicator, whichever is the lesser adjustment;

a margin of less than 2%, no change is made unless the same
trend has been shown for 2 successive years.

The aim of these adjustments from the pure formula driven approach is
to reduce the impact that significant variations to financial assistance
rates could have on the continued financial viability of individual local
authorities. This is particularly so for local authorities located in rural
areas where roading expenditure frequently makes up a major part of their
annual budget.

The minimum base rate is 43% and the highest in the 1996/97 year is
75%.

The Audit Function

Transfund's Review and Audit function monitors on a 3 yearly cycle:

Compliance with Transfund's policies and standards;

whether or not minimum maintenance standards and service levels are
being maintained;

Whether or not the predicted benefits and associated B/C are realised;

Whether the project as built, is consistent with its approved scope
and intent;

The accuracy of financial assistance claims from Transit and local
authorities.

A local authority's failure to comply with Transfund's policies and
standards may result in require them being required to repay the funding
received. The final amount to be repaid, if any, is determined by the Board.

The Review and Audit Division also conducts what it calls "theme
audits". In these audits it will take a particular type of project,
e.g. rehabilitation, review how projects of this type are managed and performed,
with a view of recommending improved practise.

Two important things to note are, that the majority of audits have at
least one external party in the audit team, drawn from either local government,
consultants or another Transit region and that the virtually all audit
reports are made public. Adopting this approach, firstly, improves the
technical competency of the team, and secondly, but perhaps more importantly,
provides an independent element that removes the potential for accusations
of bias and favouritism, particularly for the state highway sector.

Transfund itself is also subject to an independent external audit by
the Office of the Controller and Auditor General. This Office has the authority
to not only conduct financial audits in the normal way, but also effective
and efficiency audits. Financial audit reports on Transfund's activities
are tabled with its annual report in Parliament. The reports emanating
from effectiveness and audits are tabled directly in Parliament.

Lessons learnt

In summary, the following are the key lessons learnt:

That to have a nationally recognised method of project evaluation and
funding allocation methodology, significantly reduces project and location
specific political pressure as the same rules apply to everyone. Lobbying
now frequently concentrates on how to enhance the methodology itself. However,
before changes are made extensive consultation takes place as we've found
it better to bring other organisations with us as compared to imposing
change.

That the adoption of competitively tendering works and professional
services has resulted in significant savings; and

A strong audit function and the ability to impose sanctions, significantly
improves the level of compliance with the funder organisation's policies
and standards.

Conclusion

While significant parts of this paper have dealt with:

structure;

accountability relationships;

the appropriateness, fairness and efficiency of expenditure; and

the audit function,

as with any successful business, the key to a successful road fund
is revenue. Without revenue adequacy, certainty, predictability and
collectibility a road fund is destined to face severe difficulties in its
continued operation, possibly even failure. As stated earlier, in New Zealand,
that was almost the case as Government was subjected to significant amounts
of political pressure for the Transit concept to be abandoned as a result
of the flow-on effect to local authorities from the 15% budget cut referred
to earlier in the paper.

On the other hand if the key revenue elements are present, then significant
efficiencies can arise as longer-term strategies can be planned and adopted
by both the road funder and contracting industry.

DISCLAIMER

The views expressed in this paper are those of the author and do
not necessarily reflect the views of Transit New Zealand, Transfund New
Zealand and the New Zealand Government. The contents of this paper are
necessarily generalised. Readers are urged to obtain appropriate advice
upon their own particular circumstances, and must rely solely on the judgement
of such independent advice.